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Global growth will fall to its lowest level since 1982 next year, according to a major study by economists at Merrill Lynch, as it predicts that economic power will shift further to the emerging markets and away from the US and Europe.

The report forecast that global growth will fall to 1.3% next year, down from 3.2% in 2008. It is expected to rise again to 3.1% in 2010, but it would still be below the average 3.5% growth rate for the previous four years.

It said that the global financial crisis has brought an end to the "vendor financing model", where excess consumption in the US was financed by a savings glut in the emerging world. Alex Patelis, head of international economics at Merrill Lynch, said that emerging markets will become less dependent on consumption in the developed markets as domestic demand increases.

He said: "We are witnessing an end to global imbalances as US consumers adjust their habits and emerging economies turn inward. Japan, emerging Asia and Latin America will be the least vulnerable to this shift, while Europe, the Middle East and Africa, and the US, will be the most vulnerable.”
As consumers in developed markets save rather than spend money in the face of a gloomy economic outlook and rising unemployment, the developed markets are expected to pull down global growth next year: they are set to suffer negative growth of -1.2%, down from 0.9% this year. Emerging markets' growth is expected to remain positive but to fall to 4.4% from 6.4% this year.

The report underlines the economic relationship between developed and developing markets: as equities markets began to fall late last year, some investors and fund managers argued that domestic demand in the emerging markets might insulate regional equities markets from the falls suffered by their developed counterparts.

But emerging markets equities indices fell further than their developed counterparts. According to MSCI Barra, developed markets fell by 45% from peak to trough, while emerging markets fell 57%.

Global growth is likely to improve early next year as stimulus policies take effect, but policy constraints would hold back growth until mid-2010, yesterday's report said. It analysed the economic prospects for each region, and Financial News summarises the report's conclusions on the world's major regions and economies below.

US
The recession will last to the end of next year, before an "L-shaped recovery" in 2010. The slide in housing prices and equities will encourage people to save, discouraging inflation as job losses rise. Excess capacity in the economy will surge from 2% to over 8%, prompting a "massive monetary and fiscal stimulus" to prevent long-term deflation.

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The continent will suffer a full-blown recession: "The near-term outlook is bleak, and GDP is likely to contract for several quarters yet." A recovery will depend on the end of deleveraging, the impact and timing of policy stimuli, and how quickly energy-price inflation slows. Despite the negative outlook, the European economy "stands a good chance to begin improving already in early 2009", with GDP contracting more slowly over the period.

Asia ex-Japan
The region relies heavily on exports, and falling demand from developed economies will pull the region back: "When global growth slows, regional growth falls by an even greater amount, stock markets underperform, and currencies tend to depreciate." India, Indonesia, Korea and the Philippines stand out as more vulnerable among Asian economies, but China is central to the region's economic strength. Chinese exports have held up so far, but are expected to slow significantly early next year. However, the Chinese authorities, which are able to wield significant influence over economic growth through wide-ranging stimuli, could offset the impact of the decline.

Japan
Japanese growth will stay positive, at 0.2%, thanks to domestic demand absorbing some of the negative shock from the fall in exports. Growth will climb by to 2.3% in 2010 as the US and European economies turn around, along with a recovery in growth rates in emerging economies. Three factors will define the Japanese recovery: the magnitude of the Asian slowdown, the resilience of domestic demand and the impact of expansionary fiscal policy.

Latin America
The region should grow by 2.1% next year, down from 4.3% in 2008, but high inflation has likely peaked meaning that regional central banks will have room to ease monetary policy. The report is positive about the wider implications for the region: "In spite of the difficult year ahead, Latin America will complete a cycle where for the first time in decades an external shock would not have prompted a generalised deeper crisis...We think that such a dynamic is especially favorable for the widening of the middle class and thus for an expanding domestic market and more moderate electorate. The latter remains a core theme in our positive structural view for the region."